Government backdating new income levy rates to start of year

THE GOVERNMENT is backdating the new, higher income levy rates to the start of 2009, despite earlier indications that the rates would only come into force on May 1st.

Anyone who received a lump sum payment in the first four months of the year – such as a bonuses, which are traditionally paid in the first quarter or dividends – may be affected by the move.

It will also catch business owners and other company directors, many of whom were urged by their tax advisers to “front load” their 2009 income ahead of the emergency Budget to avoid the higher levies, which had been widely leaked ahead of Budget day.

However, people on PAYE whose income is spread evenly throughout the year will not face any clawback.

Among those affected may be people who took redundancy in the first four months of the year. Figures from the Department of Enterprise, Trade and Employment state that almost 21,000 people had been made redundant in the first quarter of 2009. That figure is likely to exceed 27,000 by the end of April.

While statutory redundancy payments are not subject to the income levy, as are certain ex gratia payments, many of those taking voluntary redundancy pay the levy on part of their lump sum. They will now be paying more than the 1 per cent levy they initially assumed to be their maximum exposure under the levy.

In his Budget speech, Minister for Finance Brian Lenihan gave no indication that the income levy would be backdated, stating specifically that “all of these measures [on income tax, the health levy and PRSI] will take effect from 1st May, 2009”.

However, the financial resolution passed through the Dáil on Budget day implementing the amended income levy made provision for a “composite blended” rate over the whole of 2009, which has the effect of catching any exceptional payments made before May 1st.

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Under the old system, a person earning less than €100,100 paid the income levy at 1 per cent. Although the rate jumped to 2 per cent on income up to€75,036 and 4 per cent above that in the emergency Budget, it was assumed all income taken before Budget day would certainly come under the old regime. Now it appears they will pay extra tax – 1.67 per cent on the first €75,036 and 3 per cent on the balance.

An explanatory note on the Revenue website confirms that self-employed people will be charged the composite rates.

In a note to clients yesterday, KPMG partner John Bradley said: “Individuals who received income such as bonuses or dividends in the first four months of 2009 would have expected the income to be liable to the levies at the old rates. However, the income will be liable to the levies at new composite rates.”

Mr Bradley, who heads KPMG’s international executive services unit, said a lot of people in a position to manage their affairs, such as business owners, were advised to draw down as much of their 2009 income before the Budget for tax planning purposes. He raised the prospect that a similar backdating exercise may also take place with the health levies.